What to Know About EVs

Electric vehicles (EVs) aren’t new; they debuted in 2008 and retail sales blossomed with the release of the Nissan Leaf and Chevy Volt in 2010. The Energy Improvement and Extension Act of 2008 created tax credits for the purchase of new plug-in electric vehicles. Now the Inflation Reduction Act of 2022 has revamped tax credits for buying clean vehicles, which include electric vehicles, plug-in hybrid vehicles, and hydrogen fuel cell vehicles. What’s more, there are credits for buying used vehicles and, in the near future, the ability to “sell” your credit back to the dealer. Here’s what you need to know.

Overview of credits for buying clean vehicles

Starting in 2023, consumers who purchase (but not lease) EVs may qualify for a tax credit of up to $7,500. This is the same dollar limit that applies in 2022 and prior years, but there’s a different name for the credit…and some different requirements. Through 2022, the credit is called the plug-in electric powered vehicle credit. Starting in 2023, it’s the clean vehicle credit. There are new eligibility requirements, including manufacturing rules for the vehicle, price points for qualified vehicles, and income limits on taxpayers who want to claim the credits. But watch the dates, because things get tricky.

Tax credits for EVs bought in 2022

Only new EVs can qualify for a tax credit in 2022. There are no income limits for claiming the credit for EVs purchased this year. But there are limits on the number of vehicles a manufacturer can sell before the credit phases out. GM and Tesla EVs bought this year don’t qualify. Toyota EVs purchased in the 4^th quarter of this year have a reduced credit.

Final assembly requirement. This rule applies immediately to vehicles purchased after August 16, 2022. It mandates that the final assembly of the EV occur in North America. How to do you know this? The seller will be required to provide you with a certificate (this may take time for car dealers and other sellers to be able to comply because IRS guidance is needed). In the meantime, and to help you shop, you can check a list of Model Year 2022 and early Model Year 2023 vehicles that may meet the final assembly requirement, which is provided by the Department of Energy at https://afdc.energy.gov/laws/inflation-reduction-act. You can also use the National Highway Traffic Safety Administration has a VIN Decoder at https://www.nhtsa.gov/vin-decoder to verify whether a particular EV meets the final assembly requirement.

• If you entered into a written binding contract to purchase a new qualifying EV before August 16, 2022, but do not take possession of the vehicle until on or after August 16, 2022, you may claim the EV credit based on the rules that were in effect before August 16, 2022. The final assembly requirement does not apply before August 16, 2022.
• If you purchase and take possession of a qualifying EV after August 16, 2022, and before January 1, 2023, the final assembly requirement applies for purposes of taking the credit on your 2022 return. The other rules in effect before enactment of the Inflation Reduction Act apply. For example, the manufacturer’s 200,000 vehicle cap means that there is no credit for any Tesla or GM EV purchased in 2022, irrespective of whether they are on the U.S. Department of Energy’s website list of “Vehicles with Final Assembly in North America. “

Tax credits for EVs bought in 2023 and beyond

The 200,000-vehicle cap (see above) no longer applies, but new rules come into play.

Fair market value limit. The credit is limited to clean vehicles with a manufacturer’s suggested retail price not exceeding $80,000 for SUVs and vans, and $55,000 for other vehicles (e.g., sedans).

Income limit. Starting in 2023, no credit may be claimed if a taxpayer’s modified adjusted gross income (MAGI) exceeds certain levels: $300,000 for joint filers, $225,000 for heads of households, and $150,000 for singles and married persons filing separately. Before 2023, no income limit continues to be the rule.

Credit sale. Starting in 2024, you may sell your tax credit back to the seller. Doing this at the point of sale will effectively reduce the purchase price of the vehicle. For example, if you are eligible for the top credit and you sell it to the dealer where you buy the vehicle, the purchase price of the vehicle is reduced by $7,500.

Special rules for used EVs. The maximum credit is $4,000, but cannot exceed 30% of the vehicle’s purchase price. This new credit may not be claimed more than once every three years. As in the case of new vehicles, other requirements apply:

• The sale price cannot exceed $25,000.
• The model year must be at least two years earlier than the year in which the used vehicle is purchased by the taxpayer.
• The taxpayer’s MAGI cannot exceed $150,000 if married filing jointly, $112,500 for heads of households, and $75,000 for singles.
• The credit can be transferred to the seller starting in 2024.

Recharging stations

If you add one to your home, you may be eligible for the alternative fuel refueling property credit. Starting in 2023, the credit is the lesser of 30% of the cost or $1,000 if the recharging station is in your home and is only for personal use. The credit is the lesser of 6% or $100,000 of the cost if the property is placed in service in your home or place of business if the recharging station is subject to depreciation.

Conclusion

Congress is incentivizing taxpayers to go green when it comes to their vehicles. More IRS guidance is needed to clarify some of the new rules, so watch for developments. If you’re in the market for a clean vehicle, changes in tax credit rules require you to look closely at whether it pays to buy one this year or wait until next year. Your CPA or other tax adviser can help you run the numbers.